IMPORTANT TERMS OF ADVANCED ACCOUNTING (B.

COM PART II)

ADVANCED ACCOUNTING
It covers accounting operations, patterns, merger of public holding companies, foreign currency operations, changing financial
statement prepared in foreign and local currencies. Advanced accounting also includes a variety of advanced financial
accounting issues such as lease contracts, pension funds, end of service severance payments, etc.

1) BUSINESS COMBINATION OR AMALGAMATION: Amalgamation is an agreement between two or more companies to

combine their business activities by establishing a new company having a separate legal existence
OR when two or more companies combine their businesses, this process is called business combination
TYPES OF BUSINESS COMBINATION/AMALGAMATION:
MERGER
BUSINESS
COMBINATION
ACQUISITION

1. MERGER: When both combining companies are dissolved and a new company comes into existence. Assets, liabilities
of both companies are transferred to the new company i.e. L.G is merger of two Korean companies, Lak-hui and
GoldStar which formed L.G
2. ACQUISITION or business purchase: When one of the combining companies purchases the assets and liabilities of
another company. It’s called acquisition. In acquisition one of the combining companies remained into existence
while other one is dissolved.

A A
C A
B B
MERGER ACQUISITION
OTHER TYPES OF AMALGAMATION: Amalgamation may be horizontal, vertical or conglomerate
VERTICAL MERGER: Union with corporate customer or supplier
HORIZONTAL MERGER: Merger between business competitors, such as manufacturers of the same type products or
distributors selling competing products in the same market area
CONGLOMERATE MERGER: Merger of corporations which are neither competitors nor potential or actual customers or
suppliers of each other One in which there are no economic relationships between the acquiring and the acquired firm. A pure
conglomerate merger occurs when the two merging firms operate in unrelated markets having no functional economic
relationship

METHODS OF AMALGAMATION:
1. POOLING OF INTEREST METHOD: A method to record equity once a merger has taken place. In this assets are
DEATH TO written on book value and if purchase consideration is different from net assets it’s adjusted in general reserve
POOLING OF
no goodwill or capital reserve is recorded
INTERESTS
As of June 30, 2001,
2. PURCHASE METHOD: A method to record equity after business purchase. In this assets are written on market
FASB changed the value and if purchase consideration is different from net assets, this difference is written as goodwill (if debit) or
rules for the mergers capital reserve (if credit)
and acquisitions COMPANIES IN AMALGAMATION:
game. It has 1. TRANSFEROR: Seller or amalgamating company is a company which sales its business and amalgamates into
eliminated (banned) another company
the pooling of 2. TRANSFEREE: Purchaser or amalgamated company is a company which purchases the business of an other
interests method of
company or in which an other company is amalgamated
accounting for
business
combinations PURCHASE CONSIDERATION: The amount usually in shape of cash or shares which is paid by the purchaser or
Transferee Company to the seller or Transferor Company. It’s two methods of calculating Net Asset Method and
Net Payment method
BRANCH: A section of an enterprise, geographically separated from the rest of business, controlled by head office, and
generally carrying on the same activities as of the enterprise

BRANCH ACCOUNT: An account that is prepared to find profit and loss on goods sent to branch
TYPES OF BRANCH:

DEPENENDENT SERVICES
BRANCH
HOME BRANCH
TYPES OF
BRANCH
FOREIGN INDEPENDENT
RETAIL
BRANCH BRANCH
  HOME BRANCH: a branch which is located and being operated in the same country in which its head office is
located.
 FOREIGN BRANCH: a branch which is located outside the country in which its head office is located
 DEPENDENT BRANCH: a branch who itself does not maintain its accounts and all of its accounts are maintained
by its head office. The policies and administration are controlled by the head office
 INDEPENDENT BRANCH: When the size of branch is very large, due to complexity of functions its accounts are
kept separate by itself. These branches are treated separate units and called independent branches
 SERVICE BRANCH: a branch which provides services to the customers such as booking orders and executing
orders from head office, normally it keeps expenditure accounts i.e. salaries, travelling etc.
 RETAIL SELLING BRANCH: a branch which sells physical goods or merchandise. Usually head office purchase or
manufacture all or most of the stock and sends it to retail selling branch. Head office also maintains all
accounting records

METHODS IN RETAIL SELLING BRANCH

1. DEBTOR SYSTEM: this method is suitable for small size branch. Head office maintains accounts of each branch
to know about profit and loss of each branch. Branch keeps only Memorandum Debtor Account If branch sells
goods on credit. It has further two methods

a. COST METHOD: In cost method head office sends goods to branch on cost price and all types of stock are
recorded at cost price
b. INVOICE METHOD: In invoice price method head office sends goods to branch at invoice price (more than
cost) and records all types of stock at invoice price but at the end it makes adjustments for the difference
between cost and invoice price of each type of stock

2. SOCK AND DEBTOR SYSTEM: When the size of branch is large and goods are sent by head office at invoice
price, normally stock and debtor system is used in this situation. In this method head office doesn’t maintain a
branch account in its books but only keeps a few accounts(i) Branch Stock Account, (ii) Branch Debtors Account,
(iii) Branch Expenses Account, (iv) Branch Cash Account (v) Goods sent to Branch Account, and (vi) Branch Fixed
Assets Account. At the end of the accounting year, it prepares the Branch Adjustment Account and the Branch
Profit & toss Account

DIFFERENCE BETWEEN BRANCH ACCOUNT AND DEPARTMENTAL ACCOUNT: Branches are geographically separated
whereas departments are not. Branch is opened to expand the business whereas department are opened to facilitate
the customers. Branch has many types but all departments are normally common under the same roof. Departments are
normally found in corporations but branches are normally found in industries such as banks

4) CONSIGNMENT ACCOUNT: consignment means goods that are sent by principal to his agent for the purpose of
sale and the account which is prepared to find the profit or loss on consignment is called Consignment Account

PARTIES IN CONSIGNMENT: there are two parties in consignment of goods

1. Consignor: The person sending goods is called consignor
2. Consignee: The person or agent to whom goods are sent is called consignee
 NORMAL LOSS: a type of loss which cannot be avoided or prevented such as shrinkage, evaporation, leakage and
pilferage etc.
ABNORMAL LOSS: a type of loss which can be avoided or prevented such as theft, accidents, fire, earthquake,
flood etc.
DEL-CREDERE COMMISSION: Commission received by consignee from his consignor for guaranteeing that he will
collect all the dues from the debtors
Perfoma Invoice: It is a docment which is send by consignor to consignee in which all detail of goods is
mentioned.
Account sale: It is document which is send by consignee to consignor in which sale detail is mentioned.
Sale Account: It is a sale ledger which is prepared in the books of consignee.

CONSTRUCTION CONTRACT: a formal agreement between two parties for the purpose of construction, alteration, or repair of
an asset such as building or structures (i.e. bridges, dams, facilities, roads tanks etc.)

PARTIES:
INTERNATIONA 1. Contractor: Contractor or seller is a person who promises to perform the work of construction for another party
L ACCOUNTING 2. Contractee: Contractee, customer or purchaser is a person for whom construction work is being done
STANDARD
(IAS)
TYPES OF CONSTRUCTION CONTRACT:

11
1. FIXED PRICE CONTRACT:
When price of contract is fixed in advance and it does not change unless some specific situation occurs such as change in
economic condition etc.
deals with 2. COST-PLUS CONTRACT:
accounting of When a contractor is paid after all the costs incurred in construction contract plus a specific percentage of that cost as a
construction
profit. This type of contract is called cost-plus contract
contracts

METHODS IN CONSTRUCTION CONTRACT:

1. PERCENTAGE OF COMPLETION METHOD (PCM):
When revenue is recognized after each period on the basis of percentage of completion. This method of revenue
recognition is called PCM
2. COMPLETED CONTRACT METHOD (CCM):
When revenue on contract is recognized only after the completion of contract. This method of revenue recognition is
called CCM

 RETENTION:
Retention is a percentage deducted by the customer from the payment he makes to the contractor. This deducted
amount is retained till the satisfactory completion of contract

 WORK CERTIFIED (WC):

it’s a part of work completed by contractor called work certified if it’s certified by an authority who can estimate the
work such as engineer, architect, etc.

 WORK UNCERTIFIED (WUC):

Work which has been completed by contractor but it has not been certified by authority

 WORK IN PROGRESS (WIP):

Construction Work-in-Progress is a fixed asset account in which the costs of construction is recorded. It is written on
debit side of balance sheet under Fixed Assets

 PROFIT ON INCOMPLETE CONTRACT:

If work certified is ½ or more of the contract price, then only 2/3 of the profit is shown as profit taken, rest will be shown
as profit not taken

JOINT VENTURE (J.V)

It is a temporary business association between two or more persons or organizations for sharing profit and loss without forming
a permanent partnership

FEATURES:
It’s a temporary business
It’s a form of partnership
It does not have any specific name
Its parties are called co ventures

JOINT VENTURE ACCOUNT: Joint venture is a temporary business association between two or more persons or organizations
for sharing profit and loss without forming a permanent partnership and account that is prepared to find profit and loss on a
joint venture is called joint venture account. It’s a nominal account (i.e. includes incomes and expenses only)

PARTIES IN J.V:
 Co-ventures (C.V): each party in J.V is called a co-venture

JOINT BANK ACCOUNT: It is just like a cash book. It records all the cash and bank transactions. It is opened with the
contribution of cash made by co-ventures. The investments made by them are deposited into a bank account. Any receipts of
cash and any expenses related to venture are recorded in their account. Its closing balance is transferred to the personal
account of co-ventures

Co-ventures Account: Like the capital accounts in partnership, co-venture account is opened in joint venture. It is credited with
the investment of each co-venture and debited with the drawings made by them. The profit of the venture is credited and loss
of venture is debited. This account comes to end by cash payment from joint bank account

DIFFERENCE BETWEEN J.V AND PARTNERSHIP: Partnership may not be a temporary business but J.V is always a temporary
business. Partnership always has a name but J.V does not need a name. In partnership parties are called partners but in J.V
parties are called co-venture

METHODS OF JOVINT VENTUR ACCOUNTING:

1. Separate Set Of Books: When the size of the venture is considerably large, then a separate set of books of accounts may
be maintained. Under this system, accounts are maintained just like in the case of partnership. Following accounts are
maintained in this method

1. Joint Venture Account

2. Joint Bank Account
3. Co-venture's Account

2. No Separate Set of Books: A separate set of books for joint venture transaction is not made under this method. In this
method, every co-ventures record all the transactions in his books. Following accounts are maintained in this method

1. Joint venture account

2. Co-venture's account

Sir Waqar Nazeer M.Phil Commerce (BZU)

Lecturer: United college for M.com Classes
Lecturer: City College of Science and Commerce
Sir Muhammad Irfan sb M.Phil Commerce (BZU)
Lecturer: United College for M.com Classes